International Finance

Exchange rate arrangements Exchange rate is no of units of one currency needed to acquire one unit of another currency IMF was organised to promote exchange-rate stability & facilitate int. flow of currencies. Bretton Woods Agreement established a system of fixed exchange rates where each member country set a par value or benchmark value for its currency based on gold & the US dollar. Because Dollar value was fixed at $35 per ounce of gold; the exchange of a particular currency for gold or dollar had the same implication.

Evolution of Floating Exchange Rate: IMFs initial system was fixed exchange rates as US dollar was the cornerstone of int. monetary system whose value remained constant with respect to gold value. In 1971, the then US president announced US would no longer trade dollar for gold unless other countries agree to restructure int. monetary system. Developments following this announcements (devaluation of dollar, revaluation of other currencies & widening of exchange rate flexibility from 1% to 2.25%) didnt last for too long. IMF had to change its rules to accommodate floating exchange rates. Jamaica agr., 1976 amended original rules to eliminate concept of par value to permit greater exchange rate flexibility on an individual country basis also.

As per Jamaica agr, IMF began to permit countries to select & maintain exchange rate arrangement of their choice after communicating with IMF. Role of Central Bank (CB) in exchange control Each country has a central bank that is responsible for policies affecting the value of its currency In the EU, European Central Bank, now coordinates the activities of each member countrys central bank to establish common monetary policy for the entire EU. CB reserve assets -kept in three major forms gold, foreign-exchange reserve & IMF-related assets. CBs are primarily concerned with liquidity to ensure that they have the cash & flexibility needed to protect their countrys currencies.

Mix of currencies in a countrys reserves is based on its major intervention currencies i.e. currencies in which the country trades the most. The degree to which a central bank actively manages its reserves varies from country to country. There are several ways a central bank can intervene in currency market. Depending on the market conditions, a central bank may Coordinate its action with other central banks Enter the market aggressively to change attitudes about its policies & views. Call for reassuring action to calm markets Intervene to reverse, resist or support the market trend Operate openly or indirectly through brokers

Coordination of central bank intervention can take place on a bilateral or multilateral basis. Bank for International Settlement (BIS) Basel, Switzerland, links together the central banks in the world. BIS founded in 1930, owned & controlled by a group of central banks. Major objective to promote cooperation of central banks to facilitate int. financial stability. Only 50 CBs or monetary authorities are shareholders in the BIS 11 of which are the founding banks & are from major industrial countries. Still BIS has dealings with more than 130 CBs worldwide. BIS acts as a central bankers bank.

Gets involved in swaps & other currency related transactions between the central banks in other countries. Also is a gathering place where central banks can discuss monetary cooperation. Determination of Exchange Rate The exchange rate regimes as described earlier could be either fixed or floating; with fixed rates varying in terms of how fixed they are & floating rates varying in terms of how much they actually float. Exchange rates change in different ways depending on whether they are floating rate or fixed rate regimes.

Floating Rate Regime Currencies that float freely respond to supply & demand conditions free from govt intervention Demand for a countrys currency is a function of the demand for that countrys goods & services & financial assets such as securities. The supply of a countrys currency is a function of that countrys demand for the goods & services & financial assets of some other country. The equilibrium exchange rate decided at the intersection of the two market forces. As the market forces change, exchange rate will also move to new equilibrium level.

For e.g. let us assume demand for US goods & services by Japan drops because of inflation in US. This reduced demand would result in a reduced supply of yen in the forex market Simultaneously, increasing prices of US goods lead to an increase in demand for Japanese goods by US consumers This, in turn, leads to an increase in demand for yen in the market From dollars point of view, increased demand for japanese goods lead to an increase in supply of dollar as more consumers in US try to trade their dollar for yen. Reduced demand for US goods results in a drop in demand for dollars

This pushes the exchange rate to new equilibrium level making yen more costly against dollar or reduces dollar value against yen. Thus, high inflation in one country compared to another raises the demand for currency of another country increasing value of that another currency against domestic currency. Managed Fixed Rate Regime There can be times when one or both countries might not want exchange rate to change. In a managed fixed exchange rate system, the central bank of one country holds foreign-exchange reserve, which it would have built up over the years, to face contingencies. It could sell enough of its particular currency reserve at the fixed exchange rate when there is excess demand for that currency & thereby maintains the existing rate.

Alternatively, the central bank of other country can buy the excess supply of particular currency to maintain the existing exchange rate The currency so bought becomes part of foreign exchange reserve of that central bank. The fixed rate could continue as long as one central bank has enough reserve of a particular foreign currency to sell when there is excess demand for it; or The other central bank is willing to add (buy) a particular currency to its reserve when there is excess supply of it. Sometimes, govts use fiscal or monetary policy to create a demand for their currency & to keep the value from falling. For e.g. raising interest rate

Thus, under managed fixed rate regime, a government buys & sells its currency in the open market as a means of influencing the currencys exchange rate. Purchasing Power Parity (PPP) A well known theory that seeks to define relationship between currencies. When exchange rates are free to fluctuate, rate of exchange between 2 currencies in the long run determined by their purchasing powers. Acc to Cassel the rate of exchange between 2 currencies must stand essentially on the quotient of the internal purchasing powers of these currencies. Thus, acc to PPP, the exchange rate between 2 currencies is in equilibrium when their domestic purchasing powers at that rate of exchange are equivalent.

for e.g. 1 k.g. rice in India costs `40 & in US $1. The exchange rate between $ & ` would be at equilibrium if $1 = `40. A change in purchasing power of currencies will be reflected by change in their exchange rate. Claims that a change in relative inflation between 2 countries (comparison of two countrys inflation rates) causes a change in exchange rate to keep price of goods in 2 countries fairly similar For e.g. Japans inflation rate is 2%; for US 3.5%, the dollar value expected to fall due to difference in inflation rates. On the other hand, if the domestic inflation rate is lower than that in the foreign country, the domestic currency should be stronger than that of foreign currency

However, PPP theory is subject to following criticisms Quality of goods & services may vary from country to country; hence comparison of price without regard to quality is unrealistic. Ignores cost of transportation in int. trade. Ignores the impact of int. capital movement on foreign exchange market. In reality, such movement might cause changes in exchange rate. For e.g. When there is capital inflow from US into India, demand for rupee & supply of dollar increases & this, in turn, results in appreciation in value of rupee & depreciation in the value of dollar. The theory ignores the impact of changes in exchange rate on prices.

For e.g. as a result of rupee appreciation, Indian exports may decline, supply of goods in domestic market in India increases causing fall in price in domestic market. Theory doesnt explain anything about demand for or supply of foreign exchange. When exchange rate is determined by these 2 market forces, any theory that doesnt pay adequate attention to these factors prove to be unsatisfactory. The theory starts with a given rate of exchange; but fails to explain how that rate is arrived at. Thus, it only tells how the exchange rate will change based on changes in purchasing power of 2 currencies.

Theory assumes elasticity of demand for exports & imports is equal to unity; i.e. theory holds good, only if exports & imports change in the same proportion; most of the times it doesnt hold true. No satisfactory explanations regarding short-term changes in exchange rate. Theory makes use of price index no. to measure changes in equilibrium rate of exchange; hence suffers from various limitations of price index number. Another unrealistic assumption of theory is that int. trade is free from all barriers. Finally, the theory goes contrary to general experience. There has hardly been any case where the exchange rate between two currencies has been equivalent to the ratio of their purchasing powers.

Despite its limitations, PPP theory, exposes some very imp. aspects of exchange rate determination. Indicates the relationship between internal price level & exchange rates. Explains the state of trade of a country & the nature of its balance of payments at a particular point of time. Interest Rate Although inflation has the most imp. long-run influence on exchange rates, interest rates are also important. Interest rate, net of inflation rate, would determine how attractive an economy is for investment purpose & that will, in turn, decide the demand for that currency in the foreign exchange market.

Other factors Various other factors also cause exchange-rate changes One imp factor among them is confidence level In times of turmoil (confusion), people prefer to hold currency which they consider safe. Exchange rates may also be influenced by technical factors as the release of national economic statistics, seasonal demand for currency (tourism industry) etc.

Balance of Payment (BOP) Theory BOP theory, also known as demand & supply theory or general equilibrium theory of exchange rate holds that exchange rate under free market conditions is determined by demand & supply in forex market. Price (exchange rate) of a currency is determined just like the price of any commodity. Extent of demand for & supply of countrys currency depends on countrys BOP position. If BOP is in equilibrium, demand for & supply of that currency are equal. When there is deficit in BOP, supply of currency exceeds demand for it; results in a fall in external value of the currency; When BOP is surplus; demand for currency exceeds supply of it; resulting in rise in external value of the currency.

BOP theory provides fairly satisfactory explanation of the determination of exchange rate. The theory has the following merits Unlike PPP theory, BOP theory recognises importance of all items in the BOP while determining exchange rate The theory is in conformity with the general theory of value like price of a commodity in a free market, the exchange rate is also determined by forces of demand & supply. The theory brings the determination of rate of exchange within the purview of the general equilibrium theory. That is the reason why it is also called general equilibrium theory of exchange rate determination.

The theory also indicates that BOP disequilibrium can be corrected through adjustments in exchange rate (devaluation or revaluation) instead of internal deflation or inflation. However, the defect of the theory is, it doesnt recognise the fact that the exchange rate may influence the BOP position; instead of BOP position influencing the exchange rate. Exchange Rate Systems 1. Fixed (Stable) Exchange Rate Arguments for stable exchange rate Exchange rate stability necessary for orderly development & growth of foreign trade; in its absence, exporters are uncertain about their earnings & importers not sure of amt of payments to be made.

For developing countries with persistent BOP deficit, necessary to adopt stable exchange rate to prevent continuous depreciation of its currencys external value. Necessary to attract foreign capital investment as foreign investors unwilling to invest in an economy with unstable currency. Unstable exchange rate might encourage flight of capital; exchange rate stability is necessary to prevent its outflow Stable exchange rate eliminates speculation in foreign exchange market. Stable exchange rate necessary for the successful functioning of regional associations among nations. Stable exchange rate necessary for the growth of international money & capital market.

Flexible Exchange Rate Exchange rate freely determined in an open market; varies from day-to-day Automatic variation in exchange rate, in accordance with variation in BOP position, tend to automatically restore BOP position to equilibrium. Surplus BOP, increases the exchange rate; makes foreign goods cheaper in terms of domestic currency & domestic goods more expensive in terms of foreign currency. This, in turn, encourages imports & discourages export, resulting in the restoration of BOP equilibrium.
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Similarly, if there is BOP deficit, exchange rate falls making domestic goods cheaper in terms of foreign currency & foreign goods more expensive in terms of domestic currency. This encourages exports & discourages imports; again establishing BOP equilibrium. Arguments in favour of Flexible Exchange Rate A no. of economists strongly advocates the adoption of flexible exchange rate system. Milton Friedman argues sooner a system of flexible exchange rate is established, the sooner unrestricted multilateral trade will become a real possibility This would result in domestic economic stability according to its own rights.

Arguments Against Certain economists point out serious problems associated with the system.. Some of them are Flexible exchange rate presents a situation of instability, creating uncertainty & confusion. Friedman, however, disputes this view & argues that flexible exchange rate need not be an unstable exchange rate Acc to him, the exchange rate is flexible because of instability in economic condition governing int. trade. The system makes it impossible for exporters & importers to be certain about the price they have to pay or receive for foreign exchange. This might affect foreign trade adversely.

Friedman encounters this argument by pointing out that traders can protect themselves under this system, by hedging in the future market. Under the system, there will be widespread speculation, which will have destabilising effect. However, it is argued that, speculation has stabilising effect. Friedman, observes that, if speculation is supposed to be destabilising, it implies speculators lose money on their activity. The system gives an inflationary bias to economy When currency depreciates, due to BOP deficit, imports become costlier & this stirs up an inflationary spiral This has been counter argued that, when imports become costlier, demand for them falls, & as a result foreign suppliers reduce prices.

Eurocurrency Market Growth of Eurocurrency market/Eurodollar market one of the significant devps in int economic sphere after world war II. Though, its phenomenal devp. poses problems for national monetary authorities & int monetary stability, it has helped the growth of int trade, transnational cooperation & economies of various countries. Eurodollars are financial assets & liabilities denominated in US dollars; but traded in Europe. Most of the transactions are conducted in the money market of London. Today, scope of the market stretches far beyond Europe & the dollar; Eurodollar transactions are held also in money markets other than Europe & in currencies other than dollar.

Thus, today any currency internationally supplied & demanded & in which a foreign bank is willing to accept liabilities & loan assets is eligible to become Eurocurrency In a wider sense, Eurodollar market refers to transactions in a currency deposited outside the country of its issue. Foreign currency market would be the appropriate term to describe this expanding market. Despite the emergence of other currencies & the expansion of the market to other areas, Europe & the dollar still hold the key to the market. Today, Eurodollar market consists of Asian dollar market, Riodollar market, Euro-yen market, etc. as well as Eurosterling, Euroswiss francs, Eurofrench francs etc.

Important features of the market It is an int. market & it is under no national control The market has emerged as the most imp. channel for mobilising & deploying funds on an int. scale It is a short term money market Deposits in the market ranges in maturity from one day to several months & interest is paid accordingly It is a wholesale market in the sense that Eurodollar is a currency dealt in only large units. Size of individual transaction is usually above $1 million. Highly competitive & sensible market its efficiency & competitiveness reflected in its growth & expansion.

An evaluation of Eurodollar Market Growth of Euromarket has helped to alleviate (ease) int. liquidity problems considerably. Provided credit to finance BOP deficits, enabled exporters & importers to obtain credit. Helped to meet short term credit requirements of business corporations. Provided better opportunities for the investments of short term surplus funds. Provided a market for profitable investments of funds by central banks of various countries. Supply of funds by the market has enabled commercial banks of different countries to expand domestic credit creation & helped in window dressing.

However, growth of this market, has given rise to some serious problems, especially with regard to monetary stability in various countries. Central banks & govts have been uneasy about the Eurodollar market ever since it became visible in 1958. Its explosive growth has baffled (confused) them; they know something is going on, but not sure what it is. One of the attractions for the participants of the market is, it is free from the regulations that are present in the national money market. The market has become important source of finance for governments & private firms. Despite many advantages of the market with regard to world trade as a source of int. liquidity, the major problem is that it is controlled by no one.

Balance of Payments (BOP) Balance of international payments, usually referred to as BOP refers to a systematic & summary record of a countrys economic & financial transactions with the rest of the world, over a period of time. IMF publication Balance of Payments Manual describes the concept as under Transactions in goods & services & income between an economy & the rest of the world Changes of ownership & other changes in that countrys monetary, gold, SDRs & claims on & liabilities to the rest of the world. & Transfers & counterpart entries that are needed to balance, in the accounting sense & changes which are not mutually offsetting.

Economic policies of a country, particularly the trade policy, foreign investment policy, exchange rate & currency convertibility policies, foreign exchange allocation/availability policy, monetary & fiscal policies etc. may be influenced by the BOP position & foreign exchange reserve position of the nation. Such policies affect the business & the economy to a great extent. Balance of Trade & BOP Balance of trade takes into a/c only those transactions arising out of the export & import of visible items; doesnt consider exchange of invisible items such as services rendered by shipping, insurance, banking payment of interest, dividend or spending by tourists etc.

BOP takes into a/c the exchange of both visible & invisible items (the current a/c items) & the capital a/c items (such as foreign investments, external assistance, external lending & borrowing, NRI deposits etc.) BOT includes only the visible items (merchandise trade) of the current a/c. BOP includes goods traded plus invisible transactions of current a/c & capital a/c transactions. Hence, BOP represents a better picture of a countrys economic & financial transactions with the rest of the world than the BOT. Nature of BOP accounting Transactions under BOP recorded in standard doubleentry book-keeping.

Each int. transaction undertaken by the country results in a credit entry & debit entry of equal size. As the transactions recorded in double entry book-keeping form, the BOP must always balance i.e. total amt. of debit must equal to total amt. of credit. Components of BOP The format of BOP shows imp. types of transactions that enter the BOP. Various debit & credit entries generally grouped under the following heads Current Account Capital Account Unilateral Payments Account Official Reserves Assets Account

Current Account Current a/c includes all transactions which give rise to or use of national income Current a/c consists of 2 major items i) Merchandise export & import & ii) Invisible exports & imports Merchandise exports i.e. sale of goods abroad credit entries as they give rise to monetary claims on foreigners; merchandise imports i.e. purchase of goods from abroad debit entries as they give rise to foreign monetary claims on home country Merchandise imports & exports form most imp int. transactions of many of countries.

Invisible exports i.e. sale of services credit entries; invisible imports i.e. purchase of services are debit entries. Imp. invisible exports include sale of services to other countries like transport & insurance, foreign tourist expenditure at home country, income (interest/dividend) received on loans & investments abroad. Purchase of foreign services transport & insurance, tourist expenditure abroad, income (interest/dividend) paid on loans & investments to foreigners. Software export & outsourcing have emerged as very imp items of invisible export of India's current account.

Capital Account Capital a/c consists of short-term & long-term capital transactions Capital outflow represents debit; capital inflow credit. For e.g. if an American firm invests in India, the transaction will be represented as debit entry in the capital a/c of US BOP & credit in the capiral a/c of BOP of India. Payment of interest/dividend on such investments recorded in current a/c; Interest paid recorded on the debit side of current a/c; whereas interest/dividend received recorded on the credit side of current a/c.

Unilateral Transfers/Payments Account It is another term for gifts or donations, & includes private remittances, govt. grants, reparation (compensation/damages), & disaster relief. Unilateral payments received from abroad are credits; & those made abroad are debits. Official Reserves Account Represents holdings by the govt or official agencies of the means of payment that are generally accepted for the settlement of international claims.

BOP Disequilibrium BOP of a country is said to be in equilibrium when the demand for foreign exchange is exactly equal to the supply of it. BOP is said to in disequilibrium when it shows either a surplus or deficit. There will be a deficit in BOP when the demand for foreign exchange exceeds its supply; There will be surplus in BOP when the supply of foreign exchange exceeds the demand. A no. of factors may cause disequilibrium in BOP position. These factors may be broadly classified into economic factors, political factors & sociological factors.

Economic factors responsible for BOP disequilibrium Some of the imp. economic factors responsible are Development disequilibrium Large scale development expenditures usually increase purchasing power, aggregate demand & price level resulting in substantially large imports. It is a common phenomenon in case of developing countries as above mentioned factors & also large scale import of capital goods required for carrying out various developmental programmes. which ultimately give rise to a deficit in the countrys BOP position. Cyclical disequilibrium Cyclical fluctuations of general business activity one of the prominent reasons for BOP disequilibrium.

Depression always brings about drastic shrinkage in world trade, while prosperity stimulates it. A country enjoying a boom ordinarily experiences a more rapid growth in its imports & in its exports, while the opposite will be true of other countries. Secular disequilibrium Sometimes, BOP disequilibrium persists for a very long period due to certain secular trends in the economy. For e.g. a country with high disposable income aggregate demand will be high & also the production cost due to higher wage level. As a result, price level will also be high. Due to high demand & high price level, imports will be much higher than exports.

Structural disequilibrium Structural changes in the economy causing disequilibrium in BOP. Include development of alternative sources of supply, development of better substitutes, exhaustion of productive resources etc. Shift from agricultural sector to service sector Such structural changes enhance the import of capital/consumer goods in favour of the changed direction/structure. Political factors causing BOP disequilibrium Sometimes political factors also cause disequilibrium in BOP position. e.g. of Egypt, Libya, Bangladesh, Pakistan, Nepal etc.

Political instability, internal disturbance or external invasion result in threatening situation for industry & investment might cause large capital outflow resulting in inadequacy of domestic investment & production. Policy/ideology of political party in power might affect the int. trade policy of a government. All these factors might cause disequilibrium in BOP. Social factors causing disequilibrium Certain social factors can also affect BOP position For e.g. change in taste & preference or life style of people, can affect demand for domestic/imported goods.

Correction of BOP disequilibrium A country may not be bothered about surplus BOP; but every country strives to remove or at least reduce deficit BOP. A no. of measures available for correcting BOP disequilibrium; can be broadly classified into two automatic measures & deliberate measures. Automatic corrections The theory of automatic correction of deficit BOP states that, if market forces of demand & supply are allowed to have free play, in course of time, equilibrium will be automatically restored. For e.g. when there is deficit, demand for foreign exchange exceeds its supply, & this results in an increase in exchange rate & a fall in the external value of the domestic currency (depreciation of currency).

This makes exports of the country more attractive & imports less attractive. Consequently, increase in exports & fall in imports, restores BOP equilibrium. Deliberate measures Refers to correction of disequilibrium by means of measures taken deliberately. Various deliberate measures may be broadly classified into monetary measures, trade measures & miscellaneous. Monetary measures Imp. monetary measures could be 1. Monetary contraction Level of aggregate domestic demand, domestic price level & level of (demand) import or export can be influenced by contraction or expansion of money supply in the economy.

This can be used to set right BOP disequilibrium For e.g. when there is BOP deficit, contraction of money supply, likely to reduce purchasing power & thus aggregate demand Also likely to reduce domestic price level Fall in domestic aggregate demand & domestic price level, reduces the demand for imports. In fact, fall in domestic price level, likely to increase exports. This fall in import & rise in export would help correct the disequilibrium. The reverse is true in case of expansion of money supply in an economy.

Devaluation Means reduction of official rate at which the currency is exchanged for another currency. Country with fundamental disequilibrium in BOP might devaluate its currency in order to stimulate its exports & discourage imports to set right its disequilibrium Devaluation makes export goods cheaper & imported goods costlier. 3 Exchange control A popular method employed to influence BOP position of a country. Possible where govt or central bank of the country assumes complete control over foreign exchange reserve & earnings of the country. Recipients of foreign exchange i.e. exporters expected to surrender foreign exchange to the govt in exchange for domestic currency.
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Similarly, by virtue of its control over the use of foreign exchange, the govt can control imports also. Trade measures Include export promotion measures & import reduction measures 1. Export promotion measures Encouraging exports by reducing or abolishing export duties, providing export subsidy, encouraging export production or export marketing by giving monetary, fiscal, or institutional incentives & facilities. 2 Import control By imposing or enhancing import duties, restricting import through import quotas, licensing or prohibiting altogether the import of certain items (luxury items).

Miscellaneous measures Apart from above mentioned measures, there are a no. of other measures that can help make the BOP position more favourable. For e.g. obtaining foreign loans, encouraging foreign investments, development of tourism or providing incentives to enhance inward remittance i.e. attracting NRI deposits in the case of India. Financing BOP deficit When the economy has deficit BOP i.e. when external payment obligation exceeds total receipts, an external payment problem arises. The country has to find some means immediately for meeting its payment obligations

The common methods of financing deficit BOP are Using forex reserve When the forex reserve position is comfortable, the deficit can be financed by drawing down the reserve. If a country experiences persistent deficits, the reserves would dry up, if this measure is used continuously & the govt has to resort to some other measures to finance the deficit. Therefore, cannot be used as a permanent method of financing deficit BOP in the long run. In July 1991, India had a BOP problem & the forex reserve of the country was sufficient to meet just 15 days import requirements. As a result, India had to borrow from IMF & had to pledge some of its monetary gold reserves with the Bank of England to borrow.

External assistance If the country doesnt have enough forex reserve to draw upon to finance deficit BOP, it may have to take external assistance. A very important source of such assistance for countries with BOP problem, is the IMF. In fact, one of the purposes of IMF is to provide financial assistance to help member countries to overcome BOP problems. A country can also resort to other external sources including commercial borrowing in the int. money market. Commercial borrowings & NRI deposits became dominant external sources & has substantially increased Indias debt burden. Economic liberalisation & consequent increase in FDI & FII have contributed for favourable effect on Indias BOP.

UNCTAD The United Nations Conference on Trade Development (UNCTAD) was created in 1964. Objective - to encourage cooperative effort of int. community to integrate developing countries successfully into the world. The conference, UNCTADs highest decision making body, meets every 4 years to set priorities & guidelines for the org. & provides an opportunity to debate key economic & devp. issues. UNCTAD, which aims at friendly integration of developing countries into world economy, is the focal point within the United Nations for the integrated treatment of trade & development.

Also takes up interrelated issues in the area of finance, technology, investment & sustainable devp. It is a forum for intergovernmental discussions & deliberations, supported by discussions with experts & exchange of experience. Undertakes research, policy analysis & data collection. Provides technical assistance tailored to the needs of the developing countries; With special attention to the needs of the least developed countries & countries with economy in transition. Functions of UNCTAD Promote int. trade with a view to accelerate economic devp. Formulate policies on int. trade & related problems of economic devp.

Negotiate multinational trade agreement Make proposals for putting its principles & policies into effect. Major activities of UNCTAD include research & support of negotiations, technical elaboration of new trade activities designed to assist developing countries in areas of trade & capital. Basic principles of UNCTAD Various recommendations of UNCTAD in respect of int. trade are based on certain basic principles Each country has the sovereign right freely to dispose of its natural resources in the interest of its economic devp. & well being of its own people & is free to trade with other countries.

Economic relations between countries, including trade relations, is based on respect for principles of sovereign equality of states, self-determination of people & noninterference in the internal affairs of other countries. There shall be no discrimination on the basis of differences in socio-economic systems & the adoption of various trading methods. The XI session of UNCTAD, held in Sao Paulo (Brazil) in June 2004, focused on enhancing the coherence (unity) between national development strategies & global economic processes towards economic growth & development, particularly for developing countries.

The session adopted a declaration entitled Spirit of Sao Paulo. The declaration focuses on key issues developing countries currently face. The Sao Paulo declaration or consensus focuses on 4 topics Development strategies in a globalising world. Building productive capacities & int. competitiveness. Assuring development gains from int. trading system & trade negotiations. Partnership for development. However, the consensus was criticized for lack of emphasis on corporate responsibility & accountability.

Review of the functioning of UNCTAD UNCTAD made significant contributions to the efforts of developing countries to participate & to adapt/adjust to changes in the world economy. Provided invaluable forum for advancing the relationship between trade & development. 1970s was characterised by major changes in int. economic environment like breakdown of Bretton Woods System, oil price shocks, accumulation of debt by developing countries. UNCTAD became a central forum for debates on these issues.

UNIDO (United Nations Industrial Development Organisation) Set up in January 1967, an organ of the UN General Assembly. Primary function is to promote industrialisation in developing countries by encouraging mobilisation of national & int. resources. Particular attention given to manufacturing industries. Unlike UNCTAD, UNIDO works directly with business firms, generally on an industry basis. Major activities of UNIDO fall into following three categories

Operational activities Include direct technical assistance to industries (at the request of governments of developing countries) & inplant training program where groups of technicians & engineers from developing countries face common industrial problems. Also to know how similar problems are dealt with or solved in more advanced countries. Research UNIDO conducts feasibility studies at the requirements and potential industry in developing countries. Export-oriented industries are given special attention. Coordination Various coordinating activities of UNIDO include mostly the organisation & sponsoring of inter-regional & international meetings, seminars etc.

ITC (International Trade Centre) ITC - focal point in the United Nations System for technical cooperation with developing countries in trade promotion. ITC was created by GAAT in 1964. Since 1968 has been operated by GATT (now WTO) & the UN. UN is acting through UNCTAD. As an executing agency of United Nations Development Programme (UNDP), ITC is directly responsible for implementing UNDP financial projects in developing countries related to trade promotion.

ITC can advice developing countries on their overall approach, marketing communications as well as on individual information & publicity activities. This enables establishing a strategy with broad communication objectives in line with firms international marketing goals & defining specific actions to achieve these objectives. Organising trade fair is one such activity. Helps members in developing national trade promotion strategy, including analysing export potential, choosing priority markets & setting export targets. Helps in establishing govt. institutions & services in various developing countries like the followings Central trade promotion org. & services for exporters

Export financing Export quality control Export pricing Export packaging, trade fairs & commercial publicity Assistance in legal aspect of foreign trade Int. physical distribution of goods Trade promotion services for small & medium-size enterprises Commercial representation abroad. Finding new market opportunities for current export product, also for non-traditional items & selected primary commodities Using effective marketing techniques to promote them abroad

Developing new items for export. Promoting exports of technical consulting services. ITC trains govt. trade officials, businessmen & instructors in export marketing & trade promotion. Helps in establishing a national framework for developing export training over the long run. Also assists countries in improving import substitutions & techniques to optimise scarce foreign exchange resources.